Understanding the New Employee Definition Under the Fair Work Act

The Fair Work Act is changing. From 26 August 2024, there will be new definitions for “employee” and “employer.” This guide will help you understand these changes and what they mean for your business.

Potential Risks and Next Steps

  • Misclassification Risks: If you misclassify workers, they might claim backpay for entitlements. Reckless or knowing misclassification can lead to penalties for sham contracting.
  • Backpay Claims: Misclassified employees may claim backpay for leave, overtime, and superannuation since 27 February 2024.
  • Penalties: There are penalties under the Fair Work Act for engaging in sham contracting.


Navigating the New Definition of Employee and Employer: Protecting Your Business

Understanding the New Definitions

The revised Fair Work Act mandates a comprehensive evaluation of the relationship between workers and employers. The assessment must consider the “real substance, practical reality, and true nature” of the relationship, not just the terms outlined in the contract. This means that merely referring to a written agreement is insufficient; you must consider how the contract is executed in practice.

Key Factors in Determining Employment Status

To determine whether a worker is an employee or an independent contractor, consider the following factors:

  1. Control and Independence: Evaluate the level of control your business has over the worker. Employees typically work under the direct control and supervision of the employer, while contractors have more autonomy in how they perform their tasks.
  2. Provision of Equipment: Assess whether the worker uses tools and equipment provided by the company (indicative of an employee) or their own (indicative of a contractor).
  3. Financial Arrangements: Consider how the worker is paid. Employees usually receive a salary or hourly wage with taxes deducted by the employer, whereas contractors invoice for their services and handle their own tax obligations.
  4. Risk and Liability: Determine who bears the financial risk. Employees are not usually responsible for business risks, while contractors take on the risks and benefits of their independent business operations.
  5. Consistency of Service: Look at the regularity and expectation of work. Employees often have ongoing, regular work, whereas contractors may be hired for specific projects with no expectation of ongoing work.

Practical Performance of the Contract

Beyond the written terms, courts will also examine how the relationship functions in practice. This includes:

  • Supervision: The employer typically supervises employees, while contractors operate independently.
  • Presentation: How the worker presents to the public can be telling. If they appear as part of the company, they are likely employees. If they operate under their own business identity, they are likely contractors.

Steps to Protect Your Business

  1. Review Existing Contracts: Ensure your contracts clearly reflect the intended nature of the relationship and include appropriate terms that align with the worker’s status as an employee or contractor.
  2. Assess Practical Application: Regularly review how contracts are executed in practice to ensure compliance with the new definitions.
  3. Seek Legal Advice: Engage legal experts to review your contracts and practices. They can provide tailored advice to ensure your business meets the new requirements.
  4. Update Policies and Procedures: Develop or update your HR policies and procedures to reflect these changes and ensure consistent application across your business.
  5. Training and Awareness: Educate your management and HR teams about these changes to ensure they understand the implications and can apply the criteria correctly.

Need Help? If you need assistance, Fresh HR Insights is here to help.

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Stay informed and compliant with these changes to protect your business and employees.

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